The Afterpay Touch Group Ltd share price is going gangbusters again

Credit: Daderot

Afterpay Touch Group Ltd (ASX: APT) is a technology payments company that allows its customers to buy a product now and then pay for the product later through four fortnightly payments.

This service is advantageous for the customer because fortnightly payments align with their fortnightly pay cycle and they pay no interest on their purchase. Instead, Afterpay Touch makes its revenue from charging the merchant a fee.

Q2 FY18 Business Update

In the Q2 FY18 business update, Afterpay Touch revealed that Q2 FY18 underlying sales were $551 million which represented a 50% increase on Q1 FY18 underlying sales.

Also, underlying sales for the first half of FY18 were $918 million which means that underlying annual sales for FY18 will exceed $2 billion if quarterly underlying sales continue to increase at the same rate.

Also, Afterpay Touch has shown that it can effectively manage its bad debt as it revealed that the net transaction loss for the first half of FY18 is expected to be less than 0.8% of underlying sales.

This demonstrates that controls such as an account limit of $1,000 for each customer have been able to effectively mitigate the risk of bad debts. However, it must be noted that Afterpay Touch’s business model hasn’t experienced the full economic cycle and it’s possible that a recession will dramatically increase bad debts which could diminish Afterpay Touch’s margins.

Also, a Goldman Sachs research note raised an interesting point about the hidden value of customer data that is collected by Afterpay Touch.

Analysis of this consumer data would be able to reveal insights about consumer buying behaviour which further strengthens Afterpay Touch’s value proposition to merchants. Moreover, the network effect will accelerate as more merchants start implementing the Afterpay platform.

Expansion into the US market

An announcement stated that Afterpay Touch is currently examining the possibility of entering the U.S. market. Afterpay Touch already has a proven track record of being able to successfully launch in a foreign market as shown by its successful New Zealand launch in the second half of FY17. Moreover, the opportunity to expand into the U.S. market has arisen because Afterpay Touch has recognised that factors such as millennial shopping trends in the U.S. are similar to those in the ANZ market.

Foolish takeaway

The Afterpay platform is continuing to grow strongly in the Australian market. Also, the possibility of entering the U.S. market means that there is potential for more upside with Afterpay Touch. Broker Bell Potter reportedly has a price target on the stock significantly above today’s valuation.

Motley Fool contributor Andrew Chen has no financial interest in any company mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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